To the Brink and Back

June 1, 1999byRob Murphy

“I made decisions with my heart instead of my head,” says third-generation jeweler David Felstein. Overextended and slow to react to a changing market, Hillman Jewelers of Terre Haute, Ind., filed for Chapter 11 bankruptcy protection in 1995 after 61 years in business. Now that the business has emerged from bankruptcy leaner yet stronger, the founder’s grandson and company president looks back on the most harrowing episode of his life.

Shod thigh-high in wading boots and sifting with a pitchfork and shovel through a mountain of fetid garbage atop a landfill, David Felstein could be forgiven for thinking he had hit rock-bottom. It was June 1995, and Hillman Jewelers, the five-store, Terre Haute, Ind.-based business his grandfather co-founded in 1934, was in serious trouble. The company was heavily leveraged, sales had slackened, and Felstein was months behind on his vendor payments. Now, $16,000 of consigned merchandise had vanished. Had the tray of solitaires been tossed out with the trash? A day of digging turned up Hillman’s trash, but the rings were nowhere to be found. The money for the goods came right out of cash flow.

Yet that wasn’t quite rock-bottom. A month later a switch artist robbed Hillman to the tune of $26,000, substituting cubic zirconia for loose diamonds. Even more damaging, Felstein’s efforts to negotiate out of a burdensome lease of an underperforming store had hit a brick wall. Cash flow was strained all the more as the business struggled to make payments stipulated in a 1987 buy-out deal with Felstein’s father.

Things were getting desperate. By August 1995, the jeweler decided he would have to file for bankruptcy, an almost heretical move in light of Hillman’s longstanding reputation. On the morning of Aug. 11, Felstein picked up the local newspaper to find that his misfortunes were front-page news: “Hillman’s Files Bankruptcy.” For the fiercely proud 46-year-old Terre Haute native, a prominent member of the local business and civic community, that defined rock-bottom.

Anyone who went through Felstein’s ordeal might wish to banish such memories to some inaccessible corner of the mind. It’s a measure of how much things have turned around since the summer of ’95 that the jeweler positively delights in its retelling.

Misguided by the heart. The seeds of Hillman’s troubles trace back to the boom years of the 1960s and ’70s, when Felstein’s father, Allen, expanded the business from the original site in downtown Terre Haute to nine stores throughout southern Indiana and Illinois. That bigger-is-better philosophy guided Allen Felstein’s business decisions and later those of his son, David, long after many of these markets proved unsustainable. Even after the elder Felstein retired in 1987, his son held to the belief that to close a store would signal a retreat, an admission of failure. That sense of pride would later prove costly when markets softened and underperforming stores created a drain on cash flow.

“I made decisions with my heart instead of my head,” says Felstein. “I was going by what my father would think, not on what was good for my business.”

Chief among them was his decision in 1993 to renew a lease at the Cross County Mall in Mattoon, Ill. The once-thriving mall had long been in decline as consumers flocked to tonier shopping venues 30 minutes away in Champaign. One of the anchor stores, Kmart, was now shuttered. But none of that dissuaded Felstein from signing a 10-year lease that also stipulated the construction of a new $250,000 store, which he financed through a bank loan. “We had a brand spanking new jewelry store, a gorgeous place, in a mall that was dying,” he laments.

The following year Felstein shouldered yet another heavy financial burden when a new owner at the Honey Creek Square Mall in Terre Haute demanded that Hillman Jewelers rebuild in a new location in the mall. Felstein balked but ultimately relented under pressure from the landlord. Once more he had a lovely new store. But in the process the business added $335,000 to its mounting debt.

Meanwhile, sales flagged. The store in downtown Terre Haute suffered along with other Wabash Avenue retailers as shoppers fled to the regional malls. Hillman’s store in Vincennes, Ind., likewise struggled in the face of a blighted Main Street retail environment. The Danville Mall in Danville, Ill., the site of another Hillman Jewelers store, never was successful and by the early ’90s stood 40% vacant. All the while, mass merchandisers were usurping an increasing share of the market. Battered on multiple fronts, Hillman Jewelers posted an operating loss of $318,000 for fiscal year 1994.

Push comes to shove. A consolidation sale to close a small store in Terre Haute in December 1994 raised some $350,000 and allowed Hillman to get current with its vendors. But the bank debt remained bloated, and revenues in the first half of 1995 continued to sag. Once again Felstein found himself behind on his vendor payments, in some cases more than 90 days past due. Still, he remained hopeful of turning things around—if only he could get out of the Mattoon lease. The overhead at that store had become an untenable albatross.

In July 1995 Felstein approached the Mattoon mall owner with a proposal. He would leave quietly and continue paying rent until the mall found a sublessee. Felstein named six individuals he believed would be interested in taking over the store. The landlord’s response: no deal.

By August 1995, Hillman Jewelers owed $1.2 million to the banks and $350,000 to its suppliers. Compounding the burden were hefty payments to Felstein’s father mandated by the earlier buyout agreement. (Felstein declines to divulge the dollar amount.)

It was time to seek expert advice. In a telephone conversation with Harry Aureli and Ron Silverman of Silverman Jewelers Consultants, the two consultants recommended that Felstein consider filing for Chapter 11 bankruptcy protection. Felstein recoiled at the prospect: “I’m going to go bankrupt in a town of 50,000 that I was born and raised in? My father has an ego beyond comprehension, and I’m going to have bankruptcy tagged to his name?”

In a Chapter 11 reorganization, a company continues to do business as it pays off its creditors according to a court-supervised plan that stipulates the percentage of debt to be paid and the schedule of payments. For all his trepidation, the consultants convinced Felstein that by filing for Chapter 11 he would retain control of events rather than let his creditors take the initiative. “One thing we try to get across to people is not to lose control of the situation yourself,” says Aureli. “Because no one will look after you better than you will yourself.”

On the morning of Aug. 9, 1995, Felstein and several family members met with his attorney and accountant. Sitting in were Felstein’s wife, Allison, a mortgage lender who shortly thereafter would leave a $40,000 position to work at Hillman Jewelers for $6 an hour; his sister, Jane, a registered nurse and co-owner of the business who likewise would come on board at $6 an hour; and her husband, Arnold Kosofsky, the firm’s top salesman.

Felstein’s attorney had drafted the Chapter 11 papers. Felstein and his wife signed. Then it was Arnold’s turn. “Arnold looked at me, and I could read his mind that everything we had worked for was going down the drain,” recalls Felstein. Arnold and Jane signed, and within hours the bankruptcy papers had been filed. The ordeal was just beginning.

Check the ego at the door. Over the next several days, Felstein personally called the more than 100 vendors with whom he did business. First on the list was Joel Schechter of Honora Industries, who just the previous month had agreed to stock-balance Felstein with $50,000 in inventory. This was an especially difficult call. “He didn’t raise his voice, he didn’t use profanity,” says Felstein. “But I could tell in the tone of his voice that Joel thought I had been dishonest with him, that I had taken advantage of him.”

Within 48 hours all memo goods had been returned. Felstein hired Silverman Jewelers Consultants to run bankruptcy sales as the business prepared to close all but one store, the one at the Honey Creek Square Mall in Terre Haute. Consultant Aureli’s first piece of advice for Felstein: “Check your ego at the front door.”

Over the next several months, Felstein and his creditors negotiated a repayment plan. The vendors were offered a choice of getting 40 cents on the dollar right away or the full amount in annual installments over five years. All but three vendors opted for the latter plan. The banks likewise agreed to a five-year repayment schedule to retire the $949,000 debt.

As for the real estate, the lease at the Danville Mall was set to expire in April 1996, and the landlord there accepted 40 cents on the dollar for the remaining months. The Vincennes lease was month-to-month and so was not an issue. The Mattoon mall owner never even petitioned Felstein for the remaining lease payments (which was ironic, because the Mattoon lease was the back-breaking straw that prompted the filing). In April 1996, Felstein sold the building that housed the downtown Terre Haute store for $250,000 and applied those proceeds to the bank debt.

Meanwhile, Felstein’s jewelry suppliers stood by him as he struggled to regain solvency. When Honora’s Schechter called to ask what he could do to help, Felstein found himself suddenly overwhelmed with gratitude. “I lost it,” he recalls. “I fell apart and cried like a baby. It took me 10 minutes to get my breath and composure back.” That same day, Schechter shipped several boxes of inventory on consignment. Other suppliers likewise extended favorable terms. “The jewelry industry without a doubt was there for Hillman Jewelers,” says Felstein. “It was phenomenal.”

Schechter’s faith in Felstein turned out to be well-placed. “We believed in David both personally and professionally,” says Schechter. “And time proved everybody right. He had his back against the wall at the time this happened, and he really went to great lengths to get everybody paid and honor his commitments. It turned out to be a win-win situation. I don’t think anybody could have handled it with more integrity than David did.”

Epilogue. Hillman Jewelers emerged from Chapter 11 in October 1996. Earlier this year Felstein made the third of five scheduled payments to his creditors. He now owes the vendors $103,000 and the banks $57,300. Revenues at the one remaining store for fiscal 1998, which ended April 30, approached $2 million, up from $1.7 million last year.

In the wake of Chapter 11, Felstein has changed the way he runs his business. The bankruptcy sales proved to be a learning experience in merchandising. “There were types of inventory they didn’t want to carry and didn’t think they could sell, and they learned differently when they did the sales,” says Aureli. “Now they’re better buyers because of that.”

No longer does Felstein carry low-end jewelry, and he has dropped all but a few select giftware lines. “I can’t be all things to all people,” he says. At the same time, Felstein has expanded his diamond and gemstone business. He deals now with just 50 or so vendors, not the 100-plus of years past. Staff has been trimmed from 45 employees in 1995 to 14 now (and five of them are family). Spending on advertising likewise has been curbed from a year-round $250,000 budget to a fourth-quarter $40,000 campaign.

Felstein doesn’t pretend that all is bliss. Margins are increasingly squeezed owing to competition from the Internet and other mass merchandisers. Hillman Jewelers competes with nine other retailers in the Honey Creek Square Mall alone. “Today they know it’s much more competitive out there, and they do what they have to do to make a sale,” says Aureli. Even as costs have been slashed to the bone, Felstein still finds it difficult to turn a profit.

Still, the jeweler can take pride in having weathered a battering financial tempest and come through with his business intact. That was goal No. 1. Goal No. 2 was to pay off his creditors in full, and the store is on schedule to realize that aim within two years.

Chastened by the episode, Felstein has come away with some enduring lessons. One is the need to make decisions with his head rather than his heart. He has discovered first-hand the hazards of an outsize ego. And he has learned to be content with the attenuated scope of his restructured business. “Hillman Jewelers has a place in the scheme of things, and I have to accept my place,” says Felstein. “I will never be Zales. I’m going to have a good little store and make a decent living.”